Is Canada’s accelerator model broken?

Accelerators: Is the model broken?

In just a few years they’ve popped up in cities across Canada – from Moncton to Montreal to Toronto and Vancouver.

Inspired by U.S. leaders such as Y Combinator and TechStars, Canada’s technology startup accelerators are “graduating” dozens of young companies each year — some of them impressive, some of them less so.

If all the world’s accelerators got together on a ship, it’s likely the lot of them would sink.

Except, well, there’s actually an accelerator program taking place on a ship — and, despite its physical location on the vast and open seas, it’s the perfect metaphorical harbinger of just how crowded the market for startup hopefuls has become.

The benefits of the accelerator model are well publicized: selected participants gain access to startup veterans, mentors, angel investors, and venture capitalists. In many cases the startups get money just for entering and exiting their respective programs. In each program the goal is the same: accelerate the growth of high-potential startups.
The model, while generally celebrated and regarded as a welcome boost to Canada’s entrepreneurial scene – is not without its critics. Even some accelerator organizers are raising questions about the model’s shortcomings.

Thomas Rankin’s main concern is the hype that surrounds accelerator companies. In many cases the expectations are far too high, said Mr. Rankin, investment director at Innovacorp, a Nova Scotia Crown agency focused on early stage venture capital.

“It becomes success theatre. They bring in these companies, buff them up, get them dressed right and bring in a crowd,” he said. “Certainly some of the graduates are good. That’s been proven… But a lot of them are really not up to the standard of being venture-backed companies.”

There’s an underlying expectation that all the startups will bloom into “really big, important technology companies, ” he added. And that’s simply not the case.

Mr. Rankin also wonders why some accelerators dole out seed money equally to all participants. The organizers are applying “social economics” to something that should be more “cut throat,” he said. Plus, the “pot of gold” is often derived from government sources. “You don’t want to see money going to bad companies just because they went through the process,” he said. “It creates a bit of a false economy.

“Accelerators should be part of the filter.”

Jason Bailey, a co-founder of GrowLab, a Vancouver-based accelerator, also has concerns.

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Back in 2011, Mr. Bailey and his fellow founders decided to accept five startups per cohort. Of those, they expected one to fail during the program and one to founder soon after. Two were forecast to chug along, while one startup from each cohort was expected to be “a clear, breakout success.”

But so far it hasn’t played out that way. GrowLab has organized three cohorts since 2011, totaling 15 companies. “And every single one of them is still operating,” Mr. Bailey said. “And I wonder if that’s a bad thing.”

A successful entrepreneur himself, Mr. Bailey said it’s important for startups to either succeed or “fail fast.” In other words, it’s better to realize your idea is flawed and move on, rather than toil on a losing project. But is that happening with GrowLab startups? Mr. Bailey isn’t sure.

GrowLab participants receive up to $25,000 at the program’s outset. Upon exiting, they can get up to $150,000 in the form of a convertible note from BDC Venture Capital. And many of the GrowLab startups raise additional funds — anywhere from a couple hundred thousand dollars to $1-million.

“That’s a fairly good chunk of change,” Mr. Bailey said. “These guys are young and lean. They buy a cabbage, split it in four and eat it for a week. So they’re able to survive for a long time on a small amount of money. There are definitely pros and cons to that.”

Mr. Bailey is concerned some of those startups are merely delaying their inevitable death. That, in turn, might be keeping young, talented entrepreneurs wrapped up in doomed-to-fail startups, when their skills could be used elsewhere.

“I’m concerned about it,” he said. “I wouldn’t say that is happening, but I have a theory and I’m looking for data to back that up.”

For Trevor MacAusland, unease stems from the proliferation of accelerators. Mr. MacAusland is executive director of the New Brunswick-based Launch36 accelerator, which has run two cohorts since early 2012. Launch36’s 18 companies have raised a combined $5-million, while creating nearly 100 full-time jobs, a number that is expected to double in the next year.

Those figures have inspired many people to approach Mr. MacAusland for advice on launching an accelerator in their own area or industry.

“If you read the daily newspapers it’s a grim economic outlook. We’re a ray of hope,” he said. “People are naturally gravitating to us… But there’s a danger in everybody seeing accelerators as a magic bullet for their economic woes.

“The model isn’t perfect. It’s still evolving.”

Milan Vrekic is hoping to aid that evolution process. Mr. Vrekic is well versed in the world of accelerators. His secure file transfer company, TitanFile, will soon exit from the Communitech accelerator in Waterloo. He has seen both the benefits and drawbacks of accelerators. Many programs, he said, over emphasize fundraising. Though well funded, many startups struggle when they leave the confines of their accelerator and run into new problems.

“Companies start drinking their own Kool-Aid,” he said. “Then they leave the accelerator and the hard reality sets in.” He is pledging to avoid that approach with Volta Labs, a new Halifax-based accelerator co-founded by GoInstant’s Jevon MacDonald.

Mr. Vrekic, the program’s executive director, said Volta will be different. Unlike most accelerators, Volta won’t run cohorts of a defined length. Instead, companies will stay until they are ready to exit. Plus, there will be far less emphasis on raising money.

“We are very cautious about calling it an accelerator. Most accelerators are focused on speed: get the team in, give them a few months of mentorship, flush them with cash and then kick them out,” he said. “Our focus will be more on learning and quality rather than speed.

“The goal should be to build a sustainable company, not raise a funding round.”